Saturday, April 6, 2013

Time bomb in the junk bond market

When the crisis hit dotcom (Internet companies) or when the mortgage bubble has burst, the market had always been Cassandras who can recognize the problem in advance and either made money or wrote the book, warning of impending trouble.

Unlike the previous "bubbles" today "bubble" highly profitable and risky bonds (junk bonds) is inflated with the tacit consent of the majority investors and politicians are well aware of what all this might end.

This year sales of junk bonds have risen from around the world, from Asia to Europe. The growing popularity of junk bonds is, for the most part, a direct result of the actions of Western Governments. Some 12 trillion United States was uploaded into the global financial system by central banks around the world since the bankruptcy of Lehman Brothers, in an attempt to save the banks and keep interest rates.

The result of these actions ended up increasing inflation and record-low yields on Government, so even the most conservative investors have been forced to take risks to keep their capital to get at least some profit.

In addition, banks began to lend to private investors who want to get as much profit from owning junk bonds. In Asia, such lending has become the norm among local and international banks. Experienced investors call these newbies "dumb money" because of the enthusiasm that these new investors are buying up highly risky mortgage bonds from European banks.

The most famous case of this enthusiasm became Barclays issue 10-summer shareware convertible bonds worth 3 billion United States dollars. Wanting to buy these bonds were so numerous that they managed to sell at a price five times higher than face value.

A substantial part of the demand for these bonds accounted for by private Asian banks, whose customers did not want to miss the opportunity to become British Bank bondholders to yield 7.625 percent annual interest. "Asia will buy any piece of paper, which has a yield of 8 percent annual interest, because it is considered good luck. For them, it is rather like gambling. So they arranged ", — says the employee of one of the banks.

This behavior not only scares the market speculators, but also more conservative parties, such as pension funds and insurance companies. Managing one insurance company in a private conversation, reported that the company's results are harder to invest. "It's a real headache. We have fixed obligations and to meet them, we have to have a certain rate of return. A few years ago the US yield we can get from securities rated BBB. Today the same yield paper are rated BB or below, "he says.

And finally the last confirmation razduvaûŝego bubble in the junk bond market is an event at the market of bank personnel. Last week, the Royal Bank of Scotland (RBS) induced the former head of junk bond sales units of UBS. Because RBS, like other big banks, is earning some decent money on junk bond sales. You don't have to be an expert to understand what all this will end.